A Credit Mechanism for Selecting a Unique Competitive Equilibrium

Abstract:     
We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e. money) in trade.

Number of Pages in PDF File: 22

Keywords: Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics

JEL Classification: D5, C72, E4

working papers series